Homegrown lender Kiwibank could face an increase in its wholesale funding costs after being hit by a credit rating downgrade from international rating agency Standard and Poor's.

Standard and Poor's yesterday dropped Kiwibank's rating from AA- to A+ putting it one notch below the ratings of its major Australian rivals. For the past eight months it has been at the same level.

Kiwibank's parent New Zealand Post was also downgraded by the same amount.

S&P analyst Adrian Chow said the downgrade for New Zealand Post reflected its large exposure to Kiwibank as well as expectations that the government-owned postal service would increasingly get its earnings from its parcel and courier business as well as financial services.

"Although these businesses have favourable growth prospects in the medium term, we consider these segments to be highly competitive and reflective of a 'satisfactory' business risk profile," Chow said.

New Zealand Post guarantees Kiwibank's deposits and borrowings.

The bank's deposits stood at $11.6 billion and borrowings were $1.8 billion as of the end of June.

S&P retained its standalone rating for Kiwibank of BBB giving it a probability of one in 30 of defaulting on its debt repayments over five years.

Kiwibank chief executive Paul Brock said the downgrade was disappointing but Kiwibank remained one of the world's highest rated banks.

Kiwibank gets part of its funding from borrowing on the international money market.

A Kiwibank spokesman said it was taking a wait-and-see approach on how the market would react to the downgrade but did not expect any significant change in its funding costs.

Massey University banking expert David Tripe said a downgrade from AA- to A+ would usually have some impact on borrowing costs.

"One would expect it to have an impact on wholesale funding costs but we don't know how much," Tripe said. He said it could increase Kiwibank's costs by 5 to 10 basis points. Kiwibank has led the market down in the latest round of mortgage wars, offering rates below 5 per cent but an increase in its costs could put a squeeze on its margins.

Tripe said he doubted the credit downgrade would put the average person off putting their money in Kiwibank or getting a loan from them.

But Tripe said it would put Kiwibank on the back foot when it came to competing with the Aussie banks for wholesale funding. Kiwibank had tended to be reliant on wholesale funding in the past but it was hard to know what its wholesale/retail split was now because the bank had stopped reporting the breakdown in its latest June financial report, he said.

Tripe said a significant amount of money had been pumped into Kiwibank by the government since its launch in 2002 but the bank had yet to pay a dividend back. Some have argued that Kiwibank has forced down the cost of financial services in the market but Tripe said he did not believe the bank had had a big impact.

He said Kiwibank's return on assets was less than half of a per cent per annum over the last three years.

"Kiwibank has much less equity than the other banks and that counts against them for the credit rating," he said.

Kiwibank's net profit was $79.1 million for the year to June 30.

What is a credit rating?

A credit rating is an independent opinion of the capability and willingness of a financial institution to repay its debts.[source: RBNZ]